There are many times we look back and think, “I wish I had not done that!” Lawyers may also think “I wish they [my client] had not done that,” too.
You can’t change the past, but wouldn’t it be nice to know what you should try and avoid ahead of time when possible? With that in mind, I have come up with this list of 10 things NOT to do if you are going to file for bankruptcy.
In an effort to keep this list simple and clear, I have kept out all of the qualifiers we lawyers like to include. I could have taken up pages and pages with this list if I wanted to include every possible exception or defense. I always suggest talking about your specific situation with a bankruptcy lawyer so that you can best determine what to expect in filing a bankruptcy case. But this is a good general list of guidelines for things to avoid doing if you are thinking about filing a bankruptcy:
1. Don’t Pay Back Family Members
Relatives are “insiders” under the Bankruptcy Code. If you pay back money to an “insider” during the 12-month period before you file a bankruptcy petition, it can be considered a “preference” and it can be undone by the trustee. In other words: The court may go after your relative to get the money back.
The trustee can ask for the money back, but if this does not work, the trustee can sue your family member in federal court for return of the funds.
Avoid this situation and just list your mom, dad, or other relative as a creditor (because they are a creditor), and you can tell them, if you want, that you’ll do your best to pay them back after your case is filed. You may actually be doing them a favor!!
2. Don’t Take Out a Large Cash Advance
If you take out a cash advance of more than $875* within 70 days of filing a bankruptcy case, a creditor may file a lawsuit in bankruptcy court to declare these funds as non-dischargeable. This means you would still owe this debt after your bankruptcy case is over. Cash advances include both credit card cash advances and pay day loans.
If you are thinking about filing for bankruptcy, don’t borrow any money you don’t have to – or any money that you can’t afford to pay back.
3. Don’t Buy Luxury Goods on Credit
If you make a “luxury” purchase of $600 or more* within 90 days of filing a bankruptcy case, this is also considered to be non-dischargeable and you may find yourself still owing the creditor for these debts after your case is done.
Luxury goods can include items such as clothes, electronics, or other personal goods that are not “reasonably necessary” for day-to-day support and maintenance.
4. Don’t Incur New Debt
Don’t run up a lot of debts or go out taking out new debt that you have no intention of paying. If you do, you may find yourself the subject of a legal action.
At a minimum, the court could determine that this debt must be repaid, so you would still owe the money when your case was discharged. At most, you could face fees and other penalties.
5. Don’t Pay off Some of Your Credit Cards and Expect to Keep Them
While it’s true that you do not need to identify a credit card company as a creditor if your balance due on the date your bankruptcy petition is filed is $0, this does not mean that you will get to keep that credit card.
You have to identify any payments over $600** to a single creditor during the 90-day period before you file your bankruptcy case. These payments are “preference” payments, and just like with a family member, the trustee can sue the creditor to return the funds to be redistributed amongst your other creditors.
Also, in my experience, credit card companies will often cancel your card as soon as it discovers you are in a bankruptcy. (They will know because the bankruptcy is reflected on your credit report.) Therefore, you may pay off the credit card before you file in an effort to keep it, but the company may cancel your card anyway. You’re out the cash and the card.
6. Don’t Sell or Give Away Valuable Property
Selling or giving away property is considered to be a transfer of that property. You are required to identify all transfers that took place within a 2-year period of filing your bankruptcy case. Transfers can include selling a couch on Craig’s list or eBay, holding a yard sale, gifting money to a family member, or selling your car.
Many transfers are allowable, such as selling your car for market value or holding a yard sale. However, if you gave a relative money or you sold your car to your nephew for $500 when it is actually worth $2,000, this would be considered a “fraudulent conveyance” under the Bankruptcy Code.
If you sold or gave away property for less than its value before filing a bankruptcy case, the trustee can go after these just like “preference” payments to family members.
7. Don’t Hide Things from Your Attorney
Your attorney can only give you advice based on information you provide.
Failing to identify property you own, intentionally undervaluing your property, omitting a “preference” payment or “transfer” that you think may create a problem, or otherwise providing false information can have serious consequences. Not only can your discharge be denied (meaning that you will still owe all of your debts), but your case can also be turned over to the U.S. Attorneys’ Office for prosecution of bankruptcy fraud. If found guilty, you could face time in federal prison and/or a hefty fine.
Give your attorney all the information so you can discuss ways to solve potential problems before they become even bigger problems.
8. Don’t Wipe Out Your Retirement Account
Most retirement accounts are protected from your creditors and the bankruptcy trustee. If you do not have enough in your retirement to fully resolve all of your debt issues – and handle the tax consequences of the withdrawn funds – it is generally not advisable to do so.
Pulling money out of your protected retirement accounts so that you can maintain the minimum payments on your credit card bills or medical bills is often just delaying an inevitable financial crisis. You may find yourself still owing a lot of debt – and in need of filing a bankruptcy anyway – and then you also have no retirement left.
This one particularly breaks my heart when it is an elderly client that does not have as much time to rebuild retirement funds.
9. Don’t Wipe Out Your Savings Account
Savings accounts, unlike retirement accounts, are often not protected or not fully protected from your creditors and the bankruptcy trustee. It depends on what other assets you have and what exemptions are available to you.
However, you don’t want to use your limited savings funds to pay down credit card debts and medical bills when you also have car payments or mortgage payments. Unsecured debts may be able to be discharged in a bankruptcy, while house and car payments may not.
You also may want to have some of these funds to pay for filing your bankruptcy case. Do you want to spend $5,000 or more barely putting a dent in your overall debt or spend less then $2,000 to wipe out all or most of your debt in a Chapter 7 bankruptcy case?
10. Don’t Commingle Protected Funds
Some forms of income are fully protected, such as personal injury funds, workers’ compensation benefits, and Social Security funds (disability or income). A portion of your income is generally protected, as well.
You don’t want to mix these funds together because it can become hard to identify what portion of the money in your bank account is from a personal injury award 3 months ago and what portion is from your earnings from the past 60 days. Be sure to maintain separate accounts so all sources of income can be clearly identified.
If you ever have questions about how bankruptcy laws may apply to your case, simply contact a bankruptcy lawyer. Call me at 1-866-900-7078 for a free consultation of your case to find out how bankruptcy may be able to help you!
* These amounts are adjusted every 3 years pursuant to Section 104 of the Bankruptcy Code.
** The amount listed is for individuals filing a bankruptcy with primarily consumer debts. The “preference” amount for a bankruptcy filer whose debts are primarily non-consumer debts is currently $5,850 (but this too is adjusted every 3 years pursuant to Section 104 of the Bankruptcy Code).